The Passive-Aggressive Investor For 2/24-2/28

Summary

• The backdrop is now very risk-off: international markets sold off, bond markets rallied.
• The core portfolios held up pretty well.
• I spotlight Universal Corp.

Let's start where we always do: the market and economic backdrop

• The international environment fell out of bed last week, as the coronavirus sent many global markets to near yearly lows
• The bond market was the beneficiary, as the global panic sent prices to yearly highs
• The US market suffered a massive sell-off of over 10%, making it a true "correction."

Next, here are the main ETFs I track for this column:

From Finviz.com; the week column is organized high to low; the second column is not

Last week was an equity market bloodbath, with five of the ETFs I track down over 10%. On the plus side, however, the bond markets were higher as investors sought the safe haven of conservative debt.

Here are the charts of the ETFs, starting with the bonds:All are near 2-month highs, save for the PFF (which I include on the bond side because of its bond-like features) which dropped with the broader equity markets.Meanwhile, the equity market ETFs sold off sharply.

Before moving forward, remember that last week was a unique and seldom seen global financial event where a singular trigger (the coronavirus) acted across all asset classes in a severe manner. We might see the same thing next week. But when looking at the above charts, remember that last week was rare.

Here is the performance table of the core portfolios: Data from Finviz; author's calculations. Green means an increase, while red means a decrease. The first number in the left column is the SPY/VEU percentage, while the second number is the TLT/BNDX percentage. If you're more conservative, opt for the higher TLT/BNDX percentage portfolio. If you're aggressive, reverse the process.

Before looking at the performance chart, let's dive into the performance data because it contains a lot of good information. First, note that the SPY dropped over 10%, while the VEU was off by 8.15% - big, weekly losses. The domestic and international 50/50 portfolio halved those losses or better. As I've pointed out before, a key concept of this method of investing is accepting lower performance during market rallies but smaller losses during sell-offs. This effect is obviously more pronounced in the 25/75 portfolios and less apparent in the 75/25 allocation model. But even in the 25/75 model, there are smaller losses due to the bond component.

Now, let's take a look at the performance chart: The first pair of columns (blue and orange) shows the 25/75 portfolio; the second pair (grey and yellow) shows the 50/50; the third pair (light blue and green) shows the 75/25. The last column of each series (the dark blue) is the 25x4 portfolio. The first column of each pair shows the SPY/TLT combination's performance; the second pair shows the VEU/BNDX combination's performance.

Let's take this left to right, which we'll start with the SPY 25/TLT 75 portfolios. These were the best-performing portfolios; they were positive in all time frames. In general, the performance degrades from there, as a rising equity component leads to bigger losses.

Finally, look at the 25x4 portfolio: it continues to perform at a solid rate due to its broader diversification.

Next, let's turn to the dividend aristocrats portion of the newsletter. Remember that the purpose here is to goose returns by adding solid yielding established companies to a portion of the portfolio.

Let's look at the top-performing aristocrats for the week:

Universal Corp.	(UVV)	-2.91%
Clorox	(CLX)	-3.17%
Weyco Group	(WEYS)	-4.02%
3M	(MMM)	-4.90%
Brady Corp.	(BRC)	-6.41%

Click to enlarge

Next up are the worst performers:

Eaton Vance	(EV)	-18.10%
Helmerich & Payne	(HP)	-17.84%
H.B. Fuller	(FUL)	-17.36%
Aflac	(AFL)	-16.84%
Cincinnati Financial	(CINF)	-16.24%

Click to enlarge

There's a general trend to the carnage. Most of the "best" performers are more defensive: Universal is a tobacco company; Clorox is a consumer staple; 3M is a broadly diversified company. The big losers are financial companies (where sales drop in a recession); insurers (lower yields mean lower interest income); oil and gas companies (lower demand during a recession); and specialty chemicals (lower demand during a recession). Despite that, the overall trend is brutal even for a conservative group of companies like the aristocrats.

Let's now turn to the highest and lowest dividend yields, starting with the highest:

Tanger Factory Outlet	(SKT)	11.94%
Meredith Corp.	(MDP)	9.03%
Helmerich & Payne	(HP)	7.7%
Exxon	(XOM)	6.77%
Universal Corp.	(UVV)	6.16%

Click to enlarge

And finally, the lowest dividend payers:

West Pharmaceutical	(WST)	.43%
Cintas	(CTAS)	.96%
Sherwin-Williams	(SHW)	1.04%
Ecolab	(ECL)	1.04%
Tootsie Roll	(TR)	1.12%

Click to enlarge

Now, this is actually a great time to look at going long with the aristocrats. Why you ask? Because a number of these companies have massively sold off. At a minimum, all are now cheaper. But from a technical perspective, a number of issues are now at/near 52-week lows which allows us to remind ourselves why we use technical analysis: it tells you when to buy (and sell).

Considering the market is still unstable due to the coronavirus, this is not the time to go long. It is, however, time to start making a shopping list.

While there are over 80 dividend aristocrats, we can narrow the list down immediately by looking at where we are in the business cycle. After 11 years of expansion, it's safe to say that we're closer to the end than the beginning, which means we should first focus on more defensive industries such as consumer staples, healthcare, and utilities. That leaves us with 23 companies.

Let's start with the highest yielding: Universal Corp., which is in the tobacco business:

Universal Corporation engages in the supply of leaf tobacco products worldwide. The company operates through North America, South America, Africa, Europe, Asia, Dark Air-Cured, Oriental, and Special Services segments. It is involved in procuring, financing, processing, packing, storing, and shipping leaf tobacco for sale to manufacturers of consumer tobacco products.

Tobacco is a classic defensive industry; people will buy cigarettes no matter the economic environment.

Next, let's look at the company's financials, starting with its rock solid balance sheet. During the last five years, total assets have fluctuated a little above $2 billion while total liabilities have trended between $753.31-791 million. Accounts receivable and inventory have remained at stable levels, indicating management is in control of daily operations. Long-term debt has been stable: it was $370 million in 2015 and $368 million in 2019.

Total revenue has been stable since 2015; it's been slightly more than $2 billion. SG&A expenses are modestly lower since 2015; interest expense has been stable. With the exception of 2017 (when there was a 1-time expense), net income has printed slightly above $100 million since 2015.

The best news comes from the cash flow statement:Data from Marketwatch.com

There is an ample safety margin for the dividend not only relative to net income but also to free cash flow.

Finally, the chart shows it's time to start acquiring shares:Universal is trading near a 52-week low. During the last 52 weeks, the upper 40s have provided technical support four other times; three of those times the stock rebounded to the mid-$50s. The fourth time (which occurred at the end of April) was the first bottom of a double bottom pattern.

Now, let's review the other aristocrats I've highlighted so far:It shouldn't be surprising that all of them were creamed in last week's carnage. Let's take them left to right, top to bottom.

• There were no new Seeking Alpha profiles of Helmerick & Payne last week, nor was there any major news. The stock fell not only in sympathy with the broader equity markets but also with the price of oil. The stock is trading near a 52-week low with a 7.7% dividend, which should provide a floor.
• Tanger Factory Outlet continues to move lower, which continues to raise its yield. As I noted a few weeks ago, if you purchased this issue but are nervous about its downward trajectory, dump it.
• I highlighted AT&T last week. Last week, it moved lower but traded higher on Friday, probably due to its high yield attracting buying attention. Last week, Business Quant noted that institutional buyers were upping their position over the last quarter in reaction to management doing an excellent job of managing debt and monetizing assets. Arbitrage Trader gave a favorable review of the new preferred shares while the Entertainment Oracle gave a positive review of a new show that's part of the AT&T streaming catalog.
• Several weeks ago, I noted that you should place a sell-stop under WST to lock-in gains. For the purpose of this series, I will assume that is the case and that it was triggered in this week's selling, talking off the regular coverage list.
• Exxon dropped last week with the oil market, much like HP. However, it also printed a solid up candle on Friday, like AT&T. There were two SA articles last week on XOM. Keith Williams argued against the company, noting that climate change provides an existential threat to the company. Paul Franke argued for the company, noting it provides a good hedge against a possible downturn.

That's it for this week. Happy investing until the next column.

Disclaimer: I don't have a relationship with any reader. This is not specific advice for anyone. Please read other author's and analysts who disagree with me. In other words - Buyer Beware.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.